LTV Adjustment to 0% Severely Affects Polygon PoS Flow

Aave, the leading liquidity protocol on the Polygon PoS network, is gradually withdrawing after the DAO community approved a proposal to stop providing lending services. This decision could cost Polygon over $300 million in total locked value (TVL).

Why Aave Left Polygon

Aave's move stems from a controversial proposal by Polygon in December 2024. Accordingly, Polygon plans to deploy over $1 billion of idle stablecoins on the PoS Chain bridge to seek yield on platforms like Morpho and Yearn—direct competitors of Aave.

The Aave community has expressed concerns about the potential risks of this plan, arguing that it is a less secure strategy than traditional forms of yield generation such as staking ETH or depositing DAI into MakerDAO.

Zeller warns that bridge assets pose security risks, citing previous hacks such as Multichain and Harmony bridges.

To protect the ecosystem, Marc Zeller, the founder of Aave, proposed strict risk control measures for Aave v2 and v3 on Polygon PoS. Specifically, he proposed to bring the loan-to-value (LTV) ratio of USDT and USDC to 0%, meaning that users would no longer be able to borrow stablecoins on the network.

Aave DAO's decision and consequences

On February 25, Aave DAO held an official vote, with more than 692,000 votes in favor and 117,000 votes against. The proposal to reduce the LTV of stablecoins to 0% has been passed, which could lead to users withdrawing assets from Aave on Polygon, leading to a significant decline in TVL on the platform.

Aave Labs founder Stani Kulechov emphasized that the decision reflects Aave's commitment to ensuring user safety and managing risk in the DeFi ecosystem.

Polygon's response

Polygon Labs CEO Marc Boiron had hoped that Aave would reconsider the decision. He said the Polygon community voted against deploying the asset on Morpho and Yearn, and asserted that the plan never made it past the initial proposal stage.

Aave's TVL on Polygon Network alone. Photo: DefiLlama taken on February 26, 2025

However, Boiron admitted that the final decision still rests with the Aave community. If Polygon PoS is an important source of revenue for Aave, they may look to maintain the partnership.

With Aave being the DeFi application with the largest TVL on Polygon PoS, the move to tighten stablecoin borrowing conditions could reduce liquidity and capital flows on the network.

Impact on the Polygon Ecosystem

On the same day, Aave announced on the X platform its latest upgrade, focusing on bad debt management and liquidation, while paving the way for the Umbrella initiative. Meanwhile, the Polygon ecosystem could face significant impacts from losing a major DeFi protocol like Aave.

Aave's withdrawal from Polygon PoS marks a significant turning point for the DeFi ecosystem on the network. Going forward, Polygon will need to find solutions to maintain liquidity and attract other DeFi protocols to fill the void left by Aave.